Obama proposes to tie student aid to college affordability

posted at 11:40 am on January 27, 2012 by Tina Korbe

Since his State of the Union address, President Barack Obama has been campaigning in touring five battleground states. His final stop on that tour comes today. At a rally at the University of Michigan, the president plans to unveil a plan to increase federal “investment” in the Perkins loan program — from $1 billion to $8 billion — and to revamp the formula for distributing the money. The Washington Post has a few more details:

Under the plan, colleges would be rewarded based on their success in offering relatively lower tuition prices, providing value and serving low-income students, the White House said.

The plan would not cost taxpayers additional dollars because students pay off the aid money with interest, officials stressed.

The administration also is proposing to create a competition that provides $55 million in start-up funding for higher education institutions to pursue innovation to boost productivity.

At first glance, the reformation of the distribution formula, at least, sounds like a decent idea, but coupling that reformulation with increased “investment” into the Perkins loan program is uncalled for at this point. While the administration stresses that students pay the loans back with interest, that’s no reason to spend more now when we can ill afford it — especially given the government’s demonstrated willingness to forgive student loan debts. Why not attempt the reform of the distribution formulation without increasing overall investment in the program?

Furthermore, the fact that the program has to be reformed because it presently provides perverse incentives to keep college costs high just underscores why the federal government shouldn’t be in the student loan business in the first place: The federal government’s continued push to grant students low-interest college loans (based on the flawed premise that everybody should go to college) has swelled demand for a college education, which has in turn swelled tuition prices. Higher tuition prices means students have to borrow even more. Sound familiar? The education industry is sitting on a bubble, just like the housing market was. That bubble needs to burst. Investing more federal dollars into a student loan program — even if the investment is intended to create incentives to lower costs — isn’t the way to reform it.